Archives For 401(k)

A friend of mine asked me to help her allocate her 401(k) contributions.

Here are her choices (click on the graphic to see a PDF version):

As you can see, they’re all expensive choices. I’m sure this is because it’s a small company and one of the ways providers make the plan “cheaper” for employers is by giving the employees higher-cost choices. Unfortunately, a lot of employers don’t have the time or the desire to research their options.

These plans are more often sold than bought.

The maximum dollar amount an employee can contribute to their 401(K) is increasing $500 to $17,500 for 2013. Those who are 50 and older can contribute as much as $23,000.

Let’s break down $17,500.

That’s…

$1,453.33 per month.
$47.95 per day.
$1.9977 per hour (based on 8,760 hours per year).
$.0333 per minute.

Better get to saving.

Oh, and in case you’re interested…

The geometric average monthly rate of return for the S&P 500 Index since 1926 is .779%. If a person invests the maximum of $1,453.33 per month for 25 years and gets that kind of return, they could have $1.75 million.

Something to think about.

Here’s today’s question(s) of the day:

Do you think it is too easy for people to borrow from their 401(k) plans? Have you ever borrowed from your 401(k)?

My wife and I have borrowed against her 401(k) when we bought our house in 1999. This was back in the day when her 401(k) was our only source of meaningful savings. Although it worked out well for us, I can’t say that I would recommend it for everyone.

What about you?

Check out this quote from a recent Wall Street Journal article by Andrea Coombes:

…about 40% of workers in their 20s and 30s said they had cashed out their 401(k)s or 403(b)s when they switched jobs, according to an online survey of about 1,200 people conducted in January for Fidelity Investments by CMI, a research firm.

Quiz time:

You quit your job and take a new job with a different company. You have $800 in your old company’s 401(k) plan (you had just started contributing). Do you:

1. Move the money to your new company’s 401(k) plan?
2. Move it to an IRA?
3. Cash it out because it’s such a small amount of money?

Of course options 1 and 2 are the best. Number 3 is the worst. But, how bad is it?

Well, for starters, your employer will have to withhold 20% of your $800 for income taxes. You will also lose another 10% due to the IRS’s early withdrawal penalty. So, your $800 becomes $560 by the time you actually receive it.

Now, what’s the opportunity cost for cashing out your 401(k)? As you can see from the following graphic, it can be a significant amount over a long period of time:

Don’t underestimate the potential growth of a small amount of money! Instead of looking at $800 as a small amount of money now, consider it’s future value if invested properly. And, if there’s ever a time when you are tempted to cash out your 401(k) in order to pay bills, fix your car, or take a vacation, PLEASE re-read this post!